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04 August 2010GlobalEquity ResearchDiversified Metals & Mining (Metals & Mining) / OVERWEIGHT
Research Analysts Matthew Hope61 2 8205 4669matthew.hope@credit-suisse.comPaul McTaggart61 2 8205 4698paul.mctaggart@credit-suisse.comCommodities updateCopper - scarce mine supply■ We see mined copper supply being short every year from now with the deficit reaching 770kt by 2013. We recently lifted our copper price in 2012-13 to US$3.50/lb as we consider the shortage will tighten prices. Mine supply in excess of our forecast will be needed to avoid a price spike.■ There is risk that our existing mine supply forecast will under-deliver and intensify the shortage. Forecast mine additions from 2010-14 are the largest since 1994-99, but unlike the earlier period are not underpinned by large mines, rather numerous projects of 50-200ktpa Cu output. We examine the projects, but visibility on delivery drops away by 2012. In addition, we have noted that supply forecasts typically decline as the delivery period approaches and miner guidance is found to be over-optimistic.■ We believe every possible copper project will be needed to fill the deficit, driving prices well above the cost curve. Looking at the lists of known but undeveloped copper projects, we need all the probable and approximately 25% of those possible in 2013 to fill our forecast deficit. Supply will be greatly stressed to deliver given many of the necessary projects are early stage.■ Our base case demand growth of 6-7% p.a. from 2011-13 is more sustained than in recent years, but is conservative because it reflects synchronous growth as every region rises from the demand crater of 2009. We test a lower growth scenario, but in our view it implies sustained Western World recession and interrupted urbanisation in China.Figure 1: Historic and forecast copper stocks & prices1500 5.001200 4.00900 3.00600 2.00300 1.000 0.00Source: Brook Hunt, Credit Suisse estimatesCopper - scarce mine supplyPotential copper crunch by 2012We see a major mined copper shortage starting this year and worsening through our forecast window to 2013. We see the shortage exhibited this year in refined copper draw- downs from exchange stockpiles combined with spot treatment charges for smelters approaching zero. Likewise in 2011, we expect constrained smelter output will see the majority of the mine deficit become reduce refined zinc supply, so we expect to see a stockpile reduction of around 475kt next year. However, by 2012, we expect there will be insufficient global exchange stocks remaining to support the deficit that year. In our supply- demand model, to prevent the impossible situation of negative exchange stocks, we have left the shortfalls as concentrate deficits of 380kt in 2012 and 770kt in 2013 (Figure 2, Figure 3). These are the amounts of additional mine supply that need to be found and brought into production to allow our refined copper balances to exist (Figure 5). Without this additional mined copper supply, we believe the world will face a copper crunch.Figure 2: Copper supply and demand summaryMine supply shortage in our supply-demand model, need additional copper-in- concentrate of 380kt in 2012 and 770kt in 2013 just to make it balance.2005 2006 2007 2008 2009 2010f 2011f 2012f 2013f LT (2010 real)Mine output kt 14,926 15,108 15,557 15,542 16,015 15,903 16,453 17,488 18,247Change Y-o-Y 2.0% 1.2% 3.0% -0.1% 3.0% -0.7% 3.5% 6.3% 4.3%Concentrate surplus/(deficit) kt 166 -141 -28 -22 5 6 -24 -377 -768World refined production kt 16,573 17,288 18,028 18,329 18,353 18,332 19,058 20,815 22,214Change Y-o-Y 4.1% 4.3% 4.3% 1.7% 0.1% -0.1% 4.0% 9.2% 6.7%World consumption kt 16,920 17,442 17,984 17,916 17,474 18,361 19,533 20,875 22,215Restocking kt 0 0 0 0 0 100 0 0 0Change Y-o-Y -0.6% 3.1% 3.1% -0.4% -2.5% 5.6% 6.4% 6.9% 6.4%China consumption kt 3,815 3,967 4,670 5,100 6,750 7,079 7,436 8,036 8,687Change Y-o-Y 7.0% 4.0% 17.7% 9.2% 32.4% 4.9% 5.1% 8.1% 8.1%Refined copper Balance kt -347 -154 44 413 879 -129 -475 -60 -1Reported stocks kt 155 248 238 389 688 559 84 24 23Stock/consumption wks 0.5 0.7 0.7 1.1 2.0 1.6 0.2 0.1 0.1Copper price USD/t 3,680 6,696 7,140 6,932 5,149 6,954 7,716 7,716 7,716 4,850Copper price USD/lb 1.67 3.04 3.24 3.14 2.34 3.15 3.50 3.50 3.50 2.20Source: Brook Hunt, Credit Suisse estimatesFigure 3: Copper concentrate in shortfall 2012-13f Figure 4: Add'n mine supply not keeping up with demand6004002000-200-400-600-8004 1,5003 1,3001,1002 9001 7005000300-1 100-2 -100-300-3 -500Source: Credit Suisse estimates, Brook Hunt Source: Credit Suisse estimates, Brook Hunt
Figure 5: Copper supply-demand shortfall caused by lack of mine supply22,50021,50020,50019,50018,500Exchange stocks (LME and SHFE) can fill 2010 and 2011 supply deficit; after that we will need more mine supply but have no visibility on potential projects that could come on.17,5002009 2010E 2011E 2012E 2013ESource: Credit Suisse estimates, Brook Hunt
At present, we cannot identify the necessary mine supply to provide an additional 1.2Mt (380kt+770kt) of mine supply in 2012 and 2013, beyond that in our forecasts. We need a sense of urgency, such that some mine projects accelerate and "step forward" to shorten the current timings. For this acceleration, we consider strong copper prices will be needed as an incentive. Therefore in Credit Suisse Metals & Mining Equities team's recent Commodities Quarterly - "Stay long the Asia shorts" - 19 July 2010, copper prices were upgraded for 2012 and 2013 to US$3.50/lb on the forecast mine supply deficit.So what happens if the mine shortfall of 380kt in 2012 and 770kt in 2013 is not brought forward? In that situation demand must be cut, and all available scrap will need to be collected. The driver of this would be a brutal copper price spike. We are not building a spike into our forecasts, instead expecting that a higher price will achieve the job. However, the situation will bear close attention.It points to tough times for copper smelters & refineriesAn implication of the mine supply shortage is that we see no relief in sight from margin pressure on copper smelters and refiners. Annual TC/RCs have dropped from US$95/9.5¢+ 10% price participation in 2006 - the final year before price participation was eliminated, to $47/4.7¢ in 2010, and Oz Minerals is reporting US$39/3.9¢ for the 2010 mid-year contract. These amounts convert to a received price for a combined smelter and refinery treating 30% copper concentrate, of 46¢/lb in 2006 falling to 10¢/lb in 2H'10 with only the copper premium and excess acid sales to supplement this meagre fare.How has the mine shortfall developed?Ultimately, forecast mine shortfall is caused by copper demand increasing from the crater of 2009, faster than mine supply (Figure 4). In our previous April Commodities Quarterly, the deficit we forecast was lower, but we find that mine supply forecasts are down-graded as the forecast period approaches. Since April, the mine supply forecast has dropped by 250kt for 2011, and 100kt for following years. We look at the monthly revisions below.Anatomy of the forecast mine supply revisions:We derive our raw mine supply forecasts from Brook Hunt. How have these changed?Figure 6: shows monthly mine supply forecasts for 2010 and 2011 (including probable projects) supplied by Brook Hunt. Raw 2010 production forecasts including highly probable and probable projects rose from April through to September 2009, peaking at 17.3Mt, butIf more copper projects do not appear and demand continues at the rate we expect, then we may see a copper shortage and price spike.
Unfavourable for copper smelters - expect low TC/RCs for the foreseeable future.then fell away to 16.35Mt in June 2010. However, as 2010 is now underway, part of the drop includes delays and disruption that has occurred and been added to the forecast. We really need to compare what has happened if we anticipate disruption. In our forecasts, we incorporate a disruption factor that approximates 6% of supply, and reduce it on a monthly pro rata basis through the year as actual disruption occurs and is added to the forecast supply base. Using our output with disruption adjustments, we see that 2010 forecast still peaked in September 2009, but since then the forecast has been reasonably steady decreasing by only around 100kt since the January forecast.Figure 6: Copper mine supply forecasts for 2010 & 2011 - reduce as the year approachesRisk to our supply forecasts: Producers are over- optimistic and supply forecasts subside as delivery time approaches. 2011 forecasts beginning to ease.Source: Brook Hunt, Credit Suisse estimatesFor 2011, we still have the full 6% disruption factor applied. Figure 6 shows the forecast peaked in November 2009 at -16.7Mt, but has slid in recent months to -16.4Mt as project delays kick in. If 2010 is an appropriate analogy, would expect to see further reductions through until the third quarter as visibility increases and early forecasts prove too optimistic.So what is built into the production forecasts?We have seen above that mined copper supply forecasts tend to be down graded as the forecast period approaches. What does our +2011 forecast currently look like?Figure 7 shows the additions to mined copper supply that have occurred since 1994 and extends into the forecast period. The first point immediately evident is there is a hump indicating a surge in additional mine supply forecast from 2010 to 2014. Looking at the detail in Figure 7, we can see the forecast increase will rely on mines with total output of less than 200ktpa and larger than 50kt, as indeed all the mine supply addition has since 2004. Copper supply from mines with output larger than 200ktpa output has been steady to slightly declining since 2004. The large mine projects currently under feasibility will largely start after 2015.We can further split up mined copper output into year-by-year additions (Figure 8). Looking at the past, there was clearly a great leap in copper output from 1994 to 1999, which included increases at very large mines such as the doubling of output at Escondida and Grasberg and the start-up of Collohuasi. The copper supply jump caused a huge surplus, depressing the copper price, and consequently few mine starts occurred between 1999 and 2004. Prices rose and stocks dwindled in 2005, stimulating mine starts but the mines were small and in 2006 and 2008, copper addition from +50kt mines were less than mine reductions. From 2010 to 2014, the forecasts show another massive mined copper supply addition, but unlike 1994-1999, this is not built on large mines.Is the supply hump real?One needs to be a little sceptical whenever a large change is projected to conveniently begin in the near future. This is particularly the case in this instance because we have seen that supply forecasts tend to shrink as we move forward. It doesn't assist credibility that there are no large projects underpinning the mine supply additions. Instead numerous mines in the range of 50-200kt are responsible for the increases and all need to start on schedule to deliver the jump up in output.Figure 7: Post-1994 mined copper supply addition by mine output size (kt Cu)10,0008,0006,0004,0002,000Jump in supply growth 2010-14 - is it real? Risk to delivery as noted above.
Supply growth 2010-14 from mines 50-200ktpa in output size.Source: Credit Suisse estimates, Brook HuntNote: Copper addition will not sum to current supply as mine closures are not included.Figure 8: Total additional copper from mine starts with output greater than 50kt10 1,0009 9008 8007 7006 6005 5004 4003 3002 2001 100- --1 -100-2 -200Lot of projects needed to bring on our forecast supply- will require consistently high prices.But this supply is still not enough - it is built into the supply forecast and does not close the supply gap.Source: Credit Suisse estimates, Brook HuntOn the other hand, we can see a reason why there could be a supply jump: except for a brief period in the height of the GFC, we have experienced high copper prices since the start of 2006. Surely at some point these must stimulate a mine output increase?Figure 8 shows us that this price-driven addition has not yet occurred. Perhaps the projects have all been progressing at similar rates and five years after the copper price rocketed in 2006, they are finally reaching production together to create the supply hump?. We need to look at the project list and assess the certainty of the start-ups and expansions. (Figure 9).And let us be clear - these mine additions are already in our forecast. Our shortfall will be larger if any of these mines under-deliver.Figure 9: +50kt mine additions forecast from 2010-2015 included in our supply balanceMaybe the supply jump is plausible - high prices since 2006 may have delivered more projects?These mine additions must occur or we will be short copper.Start-up Project Expansion/ GreenfieldsCompany Country Type Avg ProdnCapexCu ktpa US$mn2010 Los Pelambres Exp Antofagasta 60%/Japanese Chile Flot'n 1102010 Andacollo Exp Teck (90%)/ENAMI Chile Flot'n 80 4252010 Esperanza Green Antofagasta Chile Flot'n 198 22002010 Konkola Deep Exp Vedanta (79.4%), ZCCM 21% Zambia Flot'n 190 6742010 KOV Green Katanga 75% Gecamines Congo SX/EW-flot'n 200 12162010 Las Cruces Green Inmet (70%)/ Leucadia Spain SX/EW 72 6502011 Morenci SxEw Exp Freeport 85%/Sumitomo USA SXEW 562011 Antamina Exp BHP/ Xstrata/Teck/Mitsubishi, Peru Flot'n 1252011 Los Bronces Exp Anglo American Chile Flot'n 1802011 Cananea Re-start SCC Mexico Flot'n-SXEW 852011 El Teniente exp Exp Codelco Chile Flot'n 752011 Salobo I Green Vale Brazil Flot'n 127 11522011 Kinsevere-Nambulwa Exp Anvil 95% Congo SX/EW 60 3802011 Bisha Green Nevsun 60%/State Eritrea Flot'n 55 2502012 Jabal Sayid Green Citadel/CMCI Saudi Arabia Flot'n 60 2502012 Boleo SxEw Green Baja (70%)/Korea res Mexico SX/EW 55 9912012 Muliashi SxEw Green CNMC 85%/ZCCM-IH 15% Zambia 60 3542013 Cadia Hill/Cadia East Exp Newcrest Australia Flot'n 502013 Caserones (ex Regalito) Green Pan Pacific Chile Flot'n-SX 170 18602013 Collahuasi 140-170kt/d exp Exp Xstrata (44%)/Anglo (44%) Japanese Chile Flot'n-SX 1002013 Codelco Norte Hales Exp Codelco Chile SX/EW 1652013 Toquepala 60-100kt/d exp Exp SCC Peru Flot'n-SX 85 6162013 Oyu Tolgoi Green Ivanhoe/Rio Tinto Mongolia Flot'n 150 35002013 Tia Maria Green SCC Peru SX/EW 120 9352013 Antapaccay (Tintaya Exp) Exp Xstrata Peru Flot'n-SX 160 14702013 Toromocho Green Chinalco Peru Flo'nt-SX 210 22002013 Tenke-Fungurume Exp Exp Freeport (57.8%), Lundin, Gecamines Congo SX/EW 552014 Mount Milligan Green Thompson Creek Canada Flot'n 44 9172014 Bozshakol Green Kazakhmys Kazakhstan Flot'n 100 2000Source: Brook Hunt, Company data, Credit Suisse estimatesExamining the mines supply additionsFigure 9 has a list of mine supply additions that will provide more than 50ktpa of contained copper and are forecast to start between 2010 and 2015. This list includes both approved new mine starts and expansions, and unapproved but likely expansions and start ups. We are looking at output increases, but it should be kept in mind that large mines such as
Andina and Escondida can have annual production variances of greater than 50ktpa. We exclude from the table projects that replace output from one source with another, but have no change in expected overall output - such as El Abra's development of the sulphide reserves. Of the large projects, we have included only the underground section of Oyu Tolgoi that we expect to start up before 2015. We provide an update of large projects at the end of this note. The majority that ultimately come on stream will hit supply after 2015.2010 and 2011 good visibilityLooking at the projects in Figure 9, there is obviously strong certainty over the mines due to start this year. The expansion of Antofagasta's Los Pelambres mine is complete and the ramp up reached the planned rate by end of 1Q 2010. The new Esperanza and Andacollo expansions are Chilean porphyry projects reaching development. Esperanza is innovative in side-stepping the Chilean water shortage by piping up seawater. Vedanta has been progressing the development of Konkola Deeps for a number of years and it is finally reaching production. Inmet's Las Cruces in Spain actually started in 2009, but ramp up has been troubled and slow, probably due to the innovative processing technique. Las Cruces has high grade sulphide ore (6.2% copper) but also high deleterious smelter penalty elements, so bacterial oxidation of the sulphide followed by SX/EW is being used to produce cathode copper on site. Inmet's latest estimate is that it will reach design rate by the end of CY10. The project we consider to have the least certainty is KOV, where in late-2009 Katanga Mining adopted a fast-tracking of the new open cut, years ahead of the previous plan. Mining has commenced but the operations are behind schedule due to summer rains.In 2011, we are confident about Anglo's 260kt expansion of Los Bronces, which is a straightforward expansion of a large existing mine. For similar reasons we are also confident over the 125ktpa expansion of Antamina in Peru and Freeport's 56ktpa expansion of Morenci. Vale's Salobo is a new mine and the Kinsevere expansion project has smaller operators than others, but they appear to be progressing well. The Bisha project is under construction and reported to be on schedule for first production in 2011, although output is conservatively pushed back to 2012 in our forecasts. The project has a twelve year life although copper output is only expected to exceed 70ktpa in the first three years, then decline to less than 20ktpa.There is a little more uncertainty over Cananea in Mexico. It is a restart of an existing mine rather than an expansion. The operation has been closed since early-2007 by a strike that evolved into a bitter union versus government struggle. The mine blockade was finally cleared by the Government earlier this year and Southern Copper Corporation is assessing the damage and necessary repairs. We expect it will reopen next year, but the main risk we see would be further insurrection from former mine workers.We expect El Teniente to gradually expand from around 400ktpa to 475ktpa by 2013 through a mill debottlenecking, but there is little certainty. Codelco has had major expansion plans for years, but production remains rather static due to insufficient investment given the Chilean Government's need for funds.By 2012: supply certainty drops awayAs we reach 2012, the certainty in the new projects drops away: Citadel has only in the last few weeks raised money to begin the Jabal Sayid; we have not heard a great deal about Muliashi since China Non-ferrous Metals bought the controlling stake, and Boleo is a large deposit with unusual mineralisation being progressed by a small company with all the financial and operational risks that entails.The list of new mines forecast for 2013 is even less certain. We have reasonable confidence in the Tia Maria project, despite the local opposition that has already delayed the project; and likewise for Xstrata's Tintaya (Antapaccay) and SCC's Toquepala expansions provided they manage water issues. Oyu Tolgoi is high profile and will undoubtedly proceed, with first production around 2013. Our table only lists the productionBig +200ktpa projects are largely 2015 and beyond developments.High level of certainty on 2010 and 2011developments in Figure 9.Delivery certainty on projects in Figure 9 drops away by 2012.rate we expect from Oyu Tolgoi by 2015; the project has a five year ramp up to peak production. The feasibility study for the mill throughput expansion at Collohuasi is yet to be completed, but appears likely as the addition of 100ktpa copper is needed to maintain output that will otherwise decline from the peak reached in 2009. We expect the greatest challenge will be sourcing additional process water.Newcrest's Cadia East involves replacing output from the Cadia Hill open cut with ore from the Cadia East underground, the latter to be mined by panel caving. Until the ore has begun to cave successfully, there remains technical risk. Freeport will only begin the feasibility study into a 50% expansion of Tenke Fungurume this year following the production start last year. The extreme sovereign risk in Congo highlighted by First Quantum's experience (it has been stripped of the Kolwezi project after investing US$750mn and Congo's Supreme Court has challenged its ownership of the Frontier mine where it invested US$300mn) will no doubt play a role in any investment decision. Toromocho in Peru has the benefit of a Chinese owner with deep pockets and great construction experience, but the disadvantages of very high capex, unimpressive grade and the need to relocate 5000 residents. Caserones has even lower grade than Toromocho with equivalent capex, but as far as we are aware, Pan Pacific has decided to proceed. Codelco's Nortes Hales is a little cryptic; Hales appears to be a life extension to a current SX/EW project at Norte.Kazakhmys appears to be intent on starting Bozshakol in 2014, but we regard the mining of Mount Milligan as speculative. In any event, Mount Milligan is only expected to exceed 50kt in one year.So, even within our current mine forecast, there is some uncertainty, and potential for delays that would increase our mine supply deficits.How could the mined copper deficits be filledWe have now assessed the ore additions in the supply hump, but we still have not addressed the mined copper shortfalls in our balance - 380kt in 2012 and 770ktpa by 2013. What is available?The probable project listCommodity consultants Brook Hunt provide a list of probable copper projects that would provide a total of 477kt in 2013 if they all started at the rate in the list. The mines range from the likely - 50kt from an underground expansion at Ernest Henry which Xstrata has put back on the cards following the abandoning of the Australian Government's proposed super tax, to the unlikely - 70ktpa from a restart of BHP's closed Pinto Valley and 65ktpa from the first production from Gold Corp/ New Gold's El Morro deposit in Chile (450Mt at 0.46% copper, 0.58g/t gold). To the best of our knowledge BHP is not considering Pinto, and a recent Goldcorp investor day presentation shows El Morro as potential post-2014 growth. Subtract those two alone and we have less than half our 2013 deficit in the entire probable list.The possible project listWe now have to move to the most tenuous category of future mines, Brook Hunt's list of "possibles". The sum of production from possible mines in 2013 is 1.42Mt of copper from 65 projects, very few of which we have heard of, six of which are additions greater than 50ktpa in 2013 with the maximum being 83kt from Bahuerachi in Mexico. Scanning this list of hopefuls, it's difficult to conceive they could have any chance of being in production by 2012 or 2013, given their status remains so tenuous.Figure 9 lists projects already in our forecast. What can we use to fill the mine supply deficit?There are not enough probable projects to fill the deficit.Need to use the possible projects, but there is currently scant likelihood that these will start by the 2012 timelineFigure 10: Probable' &'possible' mine projects needed to fill additional requirement1,8001,6001,4001,2001,0008006004002000Not enough probable projects to fill deficit. Have to look for possibles.Need a price-driven sense of urgency to bring these on in time.2011 2012 2013Source: Brook Hunt, Credit Suisse estimatesOur conclusion from looking at the supply sideOur supply demand forecast includes a strong growth in output from the mine supply side, particularly in 2013, growth that may not be realised. And even if all the projects do come through as scheduled, we will still have a mine supply gap that is unfilled, reaching 770ktpa by 2013.Having searched the lists for projects could fill this supply gap, we find that there really is very little available. We have to include projects from the most tenuous category to meet the demand. Realistically, there is little chance of a project that has not started a feasibility study being brought on in the three-year time frame available.Figure 11: 2010 copper costs curve C3 total costs (normal basis)350300250200150
Mine supply is desperate and will over-ride opex and cost curve considerations. Our US$3.50/lb price is the top of the C3 (total) cost curve.1005000 2500 5000 7500 10000 12500Cumulative Production copper (kt)Source: Brook Hunt, Credit Suisse estimateSo if our demand forecast is correct, we need every mine that is available to enter production. This then, is not a story about marginal costs - the copper cost curve has no relevance. This is about supply irrespective of opex. A price far above the cost curve is a necessity to bring on the projects. Accordingly we've pushed up our 2012 and 2013 priceforecasts and have them flat lining at US$3.50/lb, which for reference is the very top of the C3 (total costs), cost curve, where it goes exponential (Figure 11).The copper situation will bear watching closely. If we advance towards 2013 and supply does not come on line as needed, there could well be a situation where supply cannot meet demand and is bid up into a price spike that then acts to crush unsustainable demand and provides an incentive to collect every piece of scrap into supply. This is not our forecast at present, but we will watch the supply-demand intently.Testing our demand forecastSo looking for where we could be wrong, is our demand forecast realistic?For the purposes of this analysis, we ignore 2010 - the year is more than half gone and LME stocks have been falling since mid-February; total exchange stocks since March, and the total balance has dropped -165kt YTD. Unless there is a stunning turn around in the second half, it appears that stocks will end the year lower, indicating a deficit.Our forecast global consumption for 2011 is an increase of 6.4% YoY, 6.9% YoY in 2012 and 6.4% in 2013 (Figure 2, Figure 16). These are stronger figures than we have seen in recent years. While larger annual increases have occurred in the past, for instance 9.3% YoY growth in 2004 our estimated demand growth is more sustained than any period since the 1995-97. Why so?Clearly these are not normal times. The global economy is still hauling itself from the Great Recession in which every developed country suffered massive demand destruction. Recovery is erratic, operating at different speeds, and remains uncertain, but the Credit Suisse house view of our economists and strategists is that double dips are most unlikely and recovery is inevitable unless there is another financial shock to cut it off.Synchronous growthWhat we have in our demand scenario is synchronous growth in every market, which is very different to the case before the GFC, and it is that which causes the stronger global growth figures.Since 2000, copper consumption in developed economies had peaked. If we ignore minor developing economies, a proxy to see this is the world ex-China (Figure 12). Copper consumption rose in the late-1990's through the dot-com boom, retreated after the bust and then levelled off until the GFC. Behind the overall global stability, what actually occurred was that copper consumption moved in different directions across the regions. Copper consumption in the US declined every year following 2000 as industry migrated overseas, whereas Japan and Europe were up and down though the period (Figure 13). But during the GFC, consumption was decimated in every developed world region so that the only direction now possible is up. Therefore, we have synchronized growth and that boosts the global percentage to a level higher than in the past.If new supply does not appear we will be looking for a price spike.Where could we be wrong?Looking at our demand forecast.Our +6% consumption forecast for 2011-13 reflects synchronous demand growth as all developed regions gradually recover from 2009 demand chasm.
Figure 12: Global copper consumption2520World ex-China copper15 consumption levelled offbefore GFC. Reflected10 some areas increasing,others falling.50Source: Brook Hunt, Credit Suisse estimatesFigure 13: Global copper consumption YoY growth/(decline) developed economies30%20%10%0%-10%After the GFC. All developed world copper consumption is climbing up from the precipitous 2009 drop.-20%-30%-40%Source: Brook Hunt, Credit Suisse estimatesWhat we have not seen is the rapid rebound in demand that occurred in the year following the 1975 recession which caused a demand crash of similar magnitude to 2009 (Figure 19). The 1976 bounce was 15% globally, 17.5% in the OECD. This time around, current macro events make it evident that recovery is taking a longer, harder road. The property overhang in the US is keeping housing starts low and developed world consumers remain cautious.At our forecast growth rates, absolute copper consumption in Western Europe will only claw its way back to 1990 levels by 2013 while North America will make it to 1986 levels (Figure 20). In assessing what these dates represent, one must keep in mind the increased intensity of copper wiring in modern houses compared to three decades ago, for greater appliances and air conditioners, computers, network cables and recharging points for mobile phones in every room.And then there is the China factor:China's rapid growth has made it the largest copper consumer, rising from 8% of global demand in 1992, to an estimated 39% in 2010. Copper growth in China now has a huge influence on global growth.Figure 14: Copper usage per capita GDP2220181614121086420Urbanised China copper consumption is approaching developed world levels, but overall China has a long way to go. Urbanisation is continuing in Tier 3 and Tier 4 cities.0 5 10 15 20 25 30 35GDP, USDk 1990 baseSource: IMF, Credit Suisse estimates, Brook HuntPer capita copper consumption and GDPOn a per capita basis, the US consumption has been falling since 2000 (Figure 14). This is due to the migration of manufacturing industries to the developing world, particularly China. The trend of falling copper is likely to be maintained, but 2009 was especially low due to housing starts reaching their nadir and the cessation of other industrial production such as vehicle manufacturing. Ultimately the recovery of housing starts and the vehicle industry should slow the decline.Export manufacturer Germany has stayed on trend. Its per capita consumption dropped in 2009, but only in line with the GDP. Japan's consumption in 2009 formed a very low outlier compared to the previous tight distribution, so recovery should be expected. Korea per capita copper consumption peaked in 2004. Subsequently its copper consumption has dropped sharply as its per capita GDP approached developed nations so it appears it will end up with Japanese style figures.China is an interesting case. On our estimates, urban China copper consumption is beginning to reach Western levels. At some point it would be expected to roll over to lower growth, but at present, China remains the world's factory so we would expect a trend more like Korea or Germany, reaching great heights before turning down. However, total China copper consumption remains low per capita. China continues to urbanise and is now focussing on the Tier 3 and 4 cities, and the West of the country, so copper consumption will continue to rise.What if - how would demand look if it was lower than we forecast?It is worthwhile testing our estimates by cutting demand forecasts to see whether a lower amount appears plausible. For the purposes of analysis, we look to cut around 400-800ktpa from years 2011 to 2013, to maintain the refined balance roughly where it is.We test our demand estimates with a low demand case scenario.In 2011, our growth for China is 5.1%, or 360kt, so we cannot take the amount the entire 400kt from China without the implausible assumption that copper consumption will fall. But we could take 140kt from 2011 if we assume the Government induced slow-down will be sufficiently extreme to cut consumption growth to 3.1%. Cutting 290kt from 2012 and 2013 maintains 6.2% and 8.4% y-o-y growth rates that appear possible, if well below the average 16.5% growth rates achieved from 2000-2009 (Figure 18).Copper demand growth in North America could be trimmed further if we assume that recovery in housing starts will be delayed beyond 2011. We could cut 100kt in 2011 and bring consumption back to 5.5%, the same as our estimate for 2010 and 110kt in the following years that would cut further year's growth to 6%. We also cut 40kt from Japan in 2011 and 50kt from following years; For Western Europe: 65kt in 2011 and 110kt from the following years; Eastern Europe: 20kt and 30kt the following years; Other Asia 60kt in 2011, 125kt in 2012 and 194kt in 2012.India we choose to leave untouched. Firstly, its copper consumption is not yet sufficiently large that a cut would greatly affect global balances. Furthermore, with a number of five year plans focusing on increasing electricity supply, using coal fired and nuclear generators, and consequently necessary electricity distribution and use, we consider there is little realistic chance of India having lower copper consumption than our y-o-y growth of 8%.Overall, for our low case we cut 417kt in 2011, 706kt from 2011, and 791kt in 2013.Figure 15: Low demand case balancesOur low case trims copper consumption from major demand regions in 2011- 2013E.2005 2006 2007 2008 2009 2010f 2011f 2012f 2013fConcentrate surplus/(deficit) kt 166 -141 -28 -22 5 6 -2 43 -39World consumption kt 16,920 17,442 17,984 17,916 17,474 18,361 19,116 20,169 21,424Restocking kt 0 0 0 0 0 100 0 0 0Change Y-o-Y -0.6% 3.1% 3.1% -0.4% -2.5% 5.6% 4.1% 5.5% 6.2%China consumption kt 3,815 3,967 4,670 5,100 6,750 7,079 7,300 7,750 8,400Change Y-o-Y 7.0% 4.0% 17.7% 9.2% 32.4% 4.9% 3.1% 6.2% 8.4%Refined Copper Balance kt -347 -154 44 413 879 -129 -84 137 -95Reported stocks kt 155 248 238 389 688 559 475 612 517Stock/consumption wks 0.5 0.7 0.7 1.1 2.0 1.6 1.3 1.6 1.3Source: Credit Suisse estimatesFigure 16: Base case copper consumption Figure 17: Low demand case copper consumption2009 2010f 2011f 2012f 2013f 2009 2010f 2011f 2012f 2013fAfrica 6.1% 7.4% 7.0% 6.5% 6.6% Africa 6.1% 7.4% 7.0% 6.5% 6.6%North America -22.9% 5.5% 11.1% 6.0% 6.7% North America -22.9% 5.5% 5.5% 6.0% 6.7%Latin America -11.9% 7.4% 7.0% 6.5% 6.6% Latin America -11.9% 7.4% 7.0% 6.5% 6.6%Japan -26.9% 11.9% 9.0% 7.9% 4.6% Japan -26.9% 11.9% 4.9% 7.0% 4.5%South Korea 5.9% 3.1% 6.4% 5.7% 2.4% South Korea 5.9% 3.1% 6.4% 5.7% 2.4%China 32.4% 4.9% 5.1% 8.1% 8.1% China 32.4% 4.9% 3.1% 6.2% 8.4%India 4.3% 21.3% 7.3% 8.1% 8.4% India 4.3% 21.3% 7.3% 8.1% 8.4%Other Asia -6.6% 7.4% 7.0% 6.5% 6.6% Other Asia -6.6% 7.4% 4.4% 3.8% 4.1%Western Europe -19.5% -0.7% 5.1% 5.1% 3.7% Western Europe -19.5% -0.7% 2.8% 3.6% 3.7%East/Central Europe -35.8% -0.7% 5.1% 5.1% 3.7% East/Central Europe -35.8% -0.7% 2.4% 3.9% 3.7%Oceania -14.6% 7.4% 7.0% 6.5% 6.6% Oceania -14.6% 7.4% 7.0% 6.5% 6.6%World -2.5% 5.1% 6.4% 6.9% 6.4% World -2.5% 5.1% 4.1% 5.5% 6.2%World ex China -16.3% 5.2% 7.2% 6.1% 5.4% World ex China -16.3% 5.2% 4.7% 5.1% 4.9%Western World -14.4% 5.7% 7.4% 6.2% 5.5% Western World -14.4% 5.7% 4.9% 5.2% 5.0%Source: Credit Suisse estimates Source: Credit Suisse estimatesOur low demand case would produce refined copper deficits and surpluses between 2011 and 2013 that would leave copper stocks reduced by only 40kt from our estimate for 2010 (Figure 15). What it means for y-o-y % changes can be seen by comparing Figure 16 with Figure 17.Evaluating the low caseIn assessing the reasonableness of this low case option, we see that lower demand is plausible, but only if we assume further urbanisation and development in China is delayed for 2011 and 2012 at least. There are few new power stations and not a great deal of retail electricity distribution in tier 3 cities with 3-6% growth. Comparing China's copper growth rates in the past with what is forecast, we see that our base forecast is already far below previous years particularly since the post-2000 boom. The 3.1% of the low case begins to look most unlikely (Figure 18).Low case would take China consumption to 3% in 2011and 6% in 2012 - basically a halt to urbanisation.Figure 18:China YoY copper demand +forecasts Figure 19: World recessions - Cu demand YoY35%30%25%20%15%10%5%0%-5%20%15%10%5%0%-5%-10%-15%-20%1 2 3 4 5 6 7 8Source: Brook Hunt, Credit Suisse estimates Source: Brook Hunt, Credit Suisse estimatesNote that the low consumption growth shown for China in 2006 is probably not correct. That year saw the short-selling controversy where Liu Qibing, a trader acting on behalf of China's secretive State Reserve Bureau (SRB) short-sold several hundred thousand tonnes of copper on the LME and was caught on the wrong side of the trade. China begrudgingly ultimately settled these trades apparently by physical delivery from its hidden stockpiles at the SRB. The appearance of this copper in export statistics as it left the country made apparent consumption calculations excessively low.For the developed nations, the low consumption case we have devised would require global industry to remain devastated from the GFC for a longer period without real recovery. The low case would push absolute copper consumption by 2013 in Western Europe back a year to 1989 levels versus 1990 for the base case. North America would fall two years to 1984 levels versus 1986 for the base case (Figure 20).Comparing our forecast Western World recovery with comparable 1976 shows it is lethargic. Much slower would require a Japan style non-recovery.Figure 20: Developed countries absolute copper usage + base & low case forecasts4,5004,0003,5003,0002,5002,0001,5001,0005000On our demand forecasts, by 2013 Europe gets back to 1990 absolute copper consumption levels and North America to 1986.Low demand case would push that back a couple of years.Source: Brook Hunt, Credit Suisse estimatesWe can assess the US numbers in a little more detail:US housing starts have been scudding along at an annualized rate of around 500k per annum since the start of 2009, after falling from around 2,000k pa throughout 2005 (Figure 21). In an average US house, there is approximately 200kg of copper. So in 2005, with 2m housing starts, we can estimate that 400kt was used in new houses and 1.9Mt for other uses out of the total US copper consumption of 2.3Mt. With housing starts at 500k pa since the start of 2009, that represents around 100ktpa of copper leaving 1.5Mtpa for other uses on our 2010 estimates. We assume that a modest but real recovery should see at least 1m housing starts and 1.8Mt of copper for other uses in the medium term, or a total of 2Mtpa of copper consumption by 2013. This is our base case for 2013 using our percentage increases. However, the low case leaves us 100kt short by 2013, representing either no housing starts recovery or industry well below 2006 and 2007 levels.Figure 21: US housing starts2,5002,0001,5001,000Eventually US housing will have to pick up and that will see copper demand recover.There is roughly 200kg in an average US house.5000Source: Company data, Credit Suisse estimatesSimilarly, European growth of any type would be weak, with growth out of the -20% GFC chasm occurring at only 3-4% pa. This would seem to push our U shaped recovery into something more akin to an L.What does this demand-side analysis tell us?A low case demand scenario would be plausible in the case of a double dip recession, a recession in China, or if we assume Japanese-style long-term depression is underway for the developed world. But if we follow the CS House view that recovery should occur provided regulators don't induce a financial shock, then the low case is too low, and even our base case looks a stretch to the low side.2015+, Status of the big copper projectsFor completeness, we also provide a summary of the status of the big future copper projects. In summary many of these will probably start, but they are really 2015 and beyond stories, and do not assist the copper balances in the short to medium term.Oyu Tolgoi. With development now approved to commence, we expect to see a 2013 start, followed by a five year ramp up to full production of 550kt from the underground and open cut workings closer to the end of the decade.Las Bambas - An Xstrata development in Peru that was just approved (3 August 2010). Las Bambas has a mineral resource of 1.13bnt at a grade of 0.77% copper. The company expects final Government approvals in the first half of 2011, a construction start in 3Q 2011 and first production in mid-2014, ramping up to is suggesting possible approval in 2011 and a late-2014 start, ramping up to 400ktpa. We always expect delays so we see it as one of the first of the 2015+ starts.Collohuasi - Anglo and Xstrata recently announced a 40% increase in resources of this 500ktpa mine to over 7bnt. They announced an expansion study to be completed by 1Q 2011, looking at increasing the output by 500ktpa to a total of over 1Mtpa. Such a 500ktpa increase would not be fast or cheap, and has not yet been approved. We expect it would take 3-4 years to see an output lift, taking it to around 2015.Pebble - this Anglo/Northern Dynasty project located 320km southwest of Anchorage in Alaska is a vast 5.9bn tonne porphyry copper-gold-molybdenum resource with 0.78% CuEQ. It is still being explored with a prefeasibility report underway so any development remains distant, but Anglo has suggested a potential copper output of around 350ktpa. Given its location, near salmon spawning grounds, and with a number of NGOs opposing the development, permitting may be an issue. Any production start would be late in the decade.La Granja - In 2008, Rio Tinto inferred a resource of 2.77bnt grading 0.51% copper. The project was previously owned by BHP, but it walked away in the early 1990s when copper prices were low after finding the deposit had high arsenic, poor leaching characteristics and a deficit of flat ground in the mountainous terrain on which to place leach pads. Rio won the deposit on tender from the Government in 2007 and is continuing the study. If it proceeds, an innovative leach process is likely to be used to leave the arsenic behind.Olympic Dam expansion - this is a potential mega-project that would consume vast amounts of capital, probably becoming the most capital intensive mine on the planet. The details previously released had a staged development with five years of pre-stripping required to remove 300 metres of sandstone cover to reach the top of the ore body. Presumably every subsequent stage would require similar periods to cut back the pit walls and increase ore exposure. The current plant and smelter/refinery would be replaced and expanded. Water and power are only two of the many factors that require intense consideration.Resolution - Rio Tinto estimated an inferred resource of 1.34bnt grading 1.51% copper and 0.04% Molybdenum. Rio is guiding towards a 2020 start i.e. beyond the tenure of the current management and board. Resolution is an impressive resource, but would require an equally impressive mining development to proceed. The orebody is 1500-2000 metres below the surface, and with rock temperatures of 85°C, Rio would need to issue oven mits.Tampakan - WMC made this discovery in the early 1990's, but ultimately abandoned it due to a low-level Marxist insurgency stewing away in its locality on Mindanao Island in the Philippines, and an inability to win over local land-owners. Xstrata picked it up and delivered a feasibility study proposing production of 340ktpa of copper and 350koz of gold for a massive investment of US5.2bn, but has recently run into a road-block, with the out- going Governor of the province approving an environmental code that bans open-pit mining. Tampakan caps a ridge and could only be mined via open cut. The incoming Governor will review the ban. Xstrata was targeting first production by around 2016 but that is now contingent on political developments.Aynak - Location has not stopped Chinese investors from commencing work on the large Aynak deposit, about 100km from Kabul in Afghanistan, with the first stage of mine and explosive ordinance removal having been completed. Aynak was opened to tender and received a number of bids, but was won by a JV consortium of CNMC and Jianxi copper. A 2015 start with a five year ramp up to 300kt looks probable, provided the region remains somewhat stable.Reko Diq - Another monster deposit in one of the world's less desirable locations: about 50km south of the Afghanistan border in Balochistan Province, North Western Pakistan. The deposit is owned by Antofagasta, Barrick and 25% by the Balochistan Government and has an estimated 4.1bnt grading 0.50% Cu and 0.3g/t gold. A feasibility study suggested production of 200ktpa of copper and 250koz of gold at a cost of US$3.3bn. It appears there may be some negotiations ahead for this project, so we suspect it will be another potential starter late in the decade. The Daily Times of Pakistan quoted an official saying the Provincial Government may wish to see a refinery built to accompany the mine, which the companies ruled out. Even if the Province chooses to build a refinery itself, some non-commercial concentrate sales would be suspected, so this is an unfavourable development.Conclusions and takeaways■ On our copper demand forecast, we are approaching a period where currently visible copper supply will not meet demand. Mined copper supply is the constraint.■ The deficit is already underway in 2010, but should be filled to the end of 2011 by copper stocks on commercial exchanges. By 2012, we will need more mine supply than is built into our current forecast. We have no visibility on what these projects will be.■ Large (+400ktpa) mined copper projects are 2015 and beyond propositions.■ Mined copper growth between 2010 and 2015 will be derived from a large number of projects with between 50ktpa and 200ktpa output. The visible projects form a notable jump in supply growth above previous growth rates.■ All of these projects, plus others that are not yet approaching development decision, will be needed to meet demand until the end of our 2013 demand forecast.■ Consistently strong prices will be needed for all the projects to stay on track and for new projects to accelerate exploration and feasibility and join the development list.■ There is a high risk that the current visible projects will not meet the development schedule. We have seen that supply estimates tend to be scaled back as actual development tends to take longer than estimated.■ If the supply schedule is not met, there is risk that the copper shortfall would see prices spike as the scarce resource is bid up. We will be watching In terms of demand, we have examined our forecast and believe it is conservative. Our 6-7% global growth figures look strong, but really represent synchronous growth as all developed regions gradually recover from the demand chasm of the 2009 Great Recession.■ Clearly, we have not seen a rapid rebound in demand such as the +15% growth that followed the 1975 recession, which was of similar magnitude to the GFC. Our 6-7% growth levels will by 2013, only return us to 1986 absolute consumption levels for North America and 1990 levels for Western Europe.■ On a per capita growth chart it is apparent that China still has a lot of copper growth required to reach developed country levels, but we expect that growth will now focus on Tier 3 and Tier 4 cities becuse the urbanised population is approaching developed country consumption levels. Our China copper growth of 5-8% is significantly slower than previous years and in our view is conservative.Companies Mentioned (Price as of 03 Aug 10)Anglo American plc (AAL.L, 2627.00 p, NEUTRAL [V], TP 3000.00 p, OVERWEIGHT) Antofagasta (ANTO.L, 1037.00 p, NEUTRAL [V], TP 1250.00 p, OVERWEIGHT)BHP Billiton (BLT.L, 2034.50 p, NEUTRAL [V], TP 2300.00 p, OVERWEIGHT) BHP Billiton Limited (BHP.AX, A$40.98, NEUTRAL, TP A$45.00)First Quantum Minerals Ltd. (FM.TO, C$64.42, OUTPERFORM [V], TP C$90.00) Freeport-McMoRan Copper & Gold (FCX, $74.80, OUTPERFORM [V], TP $95.00) Inmet Mining Corp (IMN.TO, C$50.25, NEUTRAL [V], TP C$65.00)Ivanhoe Mines Ltd. (IVN.TO, C$18.14)Kazakhmys Plc (KAZ.L, 1278.00 p, OUTPERFORM [V], TP 1650.00 p, OVERWEIGHT) Lundin Mining Inc (LUN.TO, C$4.00, OUTPERFORM [V], TP C$6.50)Minmetals Development Co. Ltd (600058.SS, Rmb16.88)Mitsubishi Materials (5711, ¥228, OUTPERFORM [V], TP ¥320, OVERWEIGHT) Newcrest Mining (NCM.AX, A$33.41, OUTPERFORM, TP A$47.00)Rio Tinto Limited (RIO.AX, A$73.00, OUTPERFORM [V], TP A$85.00)Rio Tinto Limited/PLC (RIO.L, 3450.00 p, OUTPERFORM [V], TP 4500.00 p, OVERWEIGHT)Southern Copper Corporation (SCCO, $32.39, OUTPERFORM [V], TP $37.00) Teck Resources Ltd. (TCKb.TO, C$36.19, OUTPERFORM [V], TP C$52.00)Thompson Creek Metals Co. Inc. (TCM.TO, C$9.48, OUTPERFORM [V], TP C$16.00) Vale (VALE, $29.07, OUTPERFORM [V], TP $36.00)Vedanta Resources PLC (VED.L, 2568.00 p, OUTPERFORM [V], TP 3400.00 p, OVERWEIGHT) Xstrata Plc (XTA.L, 1075.00 p, OUTPERFORM [V], TP 1450.00 p, OVERWEIGHT)Disclosure AppendixImportant Global DisclosuresI, Matthew Hope, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this reportThe analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activitiesAnalysts' stock ratings are defined as follows:Outperform (O): The stock's total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 monthsNeutral (N): The stock's total return is expected to be in line with the relevant benchmark* (range of 土 10-15%) over the next 12 monthsUnderperform (U): The stock's total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months*Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock's absolute total return potential to its current share price and (2) the relative attractiveness of a stock's total return potential within an analyst's coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. 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